Following the article on SPH Reit by fellow blogger S-Reit System Investor which I thought was well analysed and the recent buzz surrounding the injection of Seletar Mall into SPH Reit, I wanted to follow up the discussion with the management thoughts on the Malls and my thoughts into the matter.
Here is the Q&A discussion with the CEO and CFO of SPH Management at the seminar organized by the Securities Investors Association.
1.) There are reports that local retailers are struggling with high and painful rental renewals. What is your view on current rental renewals?
CEO: From a business point of view, rental is a key component and the other key factor is labour.
From a retailer point of view, each business set up should make sense to him or her. The number of labour or manpower that they can recruit is sometimes not within their control. So, retailer would wonder how to continue? They will look at good performing units and cut back on unsustainable units.
In future, retailers would be very savvy in terms of where they open new units and where they continue their presence. For example, more than 90 per cent of retailers chose to stay with Clementi because the business is tested and they know the kind of sales they can achieve. Bottom-line, we have to give them the best environment so that the mall becomes their best choice.
2.) How do you actually make your money?
CEO: Our rents are definitely not below market rate especially for Clementi Mall which has already achieved S$1,590 per square foot in first lease cycle. Even before signing the lease agreement, we discuss with the tenant about their sales projection and sustainability.
3.) What about raising parking charges?
CEO: Paragon Mall has a surcharge for vehicles parked before the mall’s shops open. This is because there is a hospital nearby. So, people visiting the hospital will park their vehicles at the mall due to limited parking availability. However, the surcharge is just S$2 and is redeemable if you shop for S$30 in the mall. We don’t want to increase the car park charges to such a point that shoppers should feel the mall is too expensive.
4.) Do you have any plans to manage overseas Reit?
CEO: Our mandate is Asia Pacific but our focus will be Singapore, at least in the near term. However, we are doing a ground study on the overseas expansion.
5.) Do you think you will exhaust the S$20 million income support in five years?
CFO: Based on our year-to-date performance, especially the Clementi mall that performed better than forecast, the income support we actually require is lower. So, at this point S$20 million of income support would be more than sufficient. However, we also have to see the economic conditions during the remaining period of the income support and we cannot guarantee that we will exhaust it faster or slower.
6.) Why are management fees based on NPI as opposed to DPU?
CFO: The management fees is based on two components, 5 per cent of net property income and 0.25 per cent of net asset value. So, management fees may not grow in proportion to net property income but the fee structure is in line with market.
7.) Is your forecast operating cash flow sufficient to pay down the debt after factoring interest expense and capital expenditure?
CFO: Yes, definitely. Our net property income margin is 75 per cent which is very healthy and is sufficient to cover the financing cost.
8.) Why did you lose S$9 million in nine months on the net hedging reserve?
CFO: This is the insurance premium we need to pay for hedging our debt. In accounting terms, it’s a fair value loss or a net payable position because of the gap between the short term and long term rate. If we see short term rate increasing then we may be in a receivable position.
9.) Why is the yield for Paragon lower than Clementi mall?
CFO: Yield for Paragon is 4.8 per cent and Clementi is 5.4 per cent. Paragon is a blended yield of medical and office as well as retail. The yield of Clementi Mall is in line with other suburban malls.
My Thoughts
Mall business is getting to become a more complex business proposition in the 21st century. Unlike other properties such as office or industrial which is highly driven more on the economy, property managers have to be creative and innovative to make the malls an active and vibrant for shoppers to visit. A successful retail malls is about strategy and implementation and requires constant work and determination to nurture a good mall.
Many people seems to blur the relationship between landlords (management in Reit instance) and tenants. The truth is rental reversion is highly correlated to traffic visitors and therefore management's objective to increasing rental reversions is to promote traffic arrivals into the malls via several initiatives such as organizing events to create a buoyant and lively atmosphere. On the other hand, the tenant's role is to convert traffic into sales and hiring a good sales person (and product) would boost its existence amongst the many competitors in the mall.
I previously blogged (Link Here) about how finding the right tenant mix is crucial to improving traffic and to the long term success of the malls. Having simply the highest "income" generators (usually the F&B and Fashion) is not enough to sustain a long term success of the mall business and usually you would need those "traffic" generators (but "income" destroyers) in your malls to pull traffic in. Example of such would be supermarket chain or cinema, and to the delight of Seletar malls, they have secured Shaw theatres and NTUC Fairprice supermarket among their anchor tenants.
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| Initial Tenant's Mix on SPH Reit Malls |
If you compare with a few of the properties below, you would also see that the cap rate and average rental rate for Seletar Malls are rightfully below those matured malls like Plaza Singapura or even Clementi Mall. You can see therefore that the management would probably need to work their way up to increase the passing rent before the malls get sold to SPH Reit and this might take at least a year or two more before results can be seen. Therefore, we would probably see at least 2016 before Seletar Malls get injected into the Reit. With the parent company still holding major 70% stake in the Reit, it is very possible that they would want to manage the mall well and nurturing them before injecting into the Reit.
| Comparable Property | Owner | Cap Rate | Avg Rent/psf |
|---|---|---|---|
| Paragon | SPH Reit | 5.28% | $21.70 |
| Clementi Mall | SPH Reit | 5.11% | $15.90 |
| CauseWay Point | FCT | 5.42% | $13.50 |
| Plaza Singapore | CMT | 5.41% | $20.10 |
| Seletar Mall | SPH Reit | 4.85% | $11.90 |
I'm vested in SPH but not SPH Reit and the above are purely based on my own personal opinion.
